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Race is on to bail out bailout plan

Times Staff Writers

Rushing to win quick congressional -- and public -- approval for its $700-billion bailout of the tottering financial system, the Bush administration moved toward compromises Monday that would have been inconceivable even a few weeks ago, including new aid for debt- laden homeowners.

But even as negotiators signaled that some version of the bailout bill would almost certainly pass, perhaps this week, the financial markets threatened to pop another rivet.

The Dow Jones industrial average sank 372.25 points, or 3.3%, on Monday after climbing nearly 800 points over two days last week on initial word of the rescue proposal. As many investors shifted money from stocks to commodities as the trading week began, the price of oil, gold and other commodities soared, while the dollar plunged against other major currencies.

Meanwhile, President Bush ratcheted up pressure for a deal.

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“The whole world is watching to see if we can act quickly to shore up our markets and prevent damage to . . . businesses, our housing sector and retirement accounts,” he said in a statement.

The action now centers on bargaining between Treasury Secretary Henry M. Paulson and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

Although the measure must also pass the Senate, the administration has apparently calculated that if it can win House approval, senators will go along. Administration officials are understood to have had only a few conversations with Frank’s Senate counterpart, Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee.

Frank laid out the price of his support for the government bailout Sunday in a 42-page draft that congressional staffers and administration officials said was now the working document for negotiations.

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In a briefing for reporters, Frank said agreement had been reached in several broad areas, among them: creation of an independent oversight board to monitor the Treasury Department’s handling of the bailout and a requirement that the department seek to minimize home foreclosures by slicing the interest rate and even the outstanding loan amount of many of the troubled mortgages it buys.

Frank said at the early afternoon briefing that he and Paulson had also agreed to a Democratic proposal for Washington to get rights to buy stock in the companies whose troubled assets the government buys. That would allow taxpayers to benefit from increases in the companies’ stock prices. But by the end of the day Frank indicated that an obstacle to agreement on such a provision had developed, though he didn’t elaborate.

House Democrats and the Bush administration also remained far apart on several crucial issues.

For example, Frank wants to give the government the power to cap the compensation of executives of the firms helped by the bailout.

“I just think it is inconceivable . . . that the taxpayer should put money at risk because of bad decisions made by people who would then continue to be rewarded without any restriction,” Frank said.

But administration officials said Paulson was “dead set” against a compensation cap, fearing that it would discourage companies from taking advantage of the program.

In addition, Frank wants to make it easier for bankruptcy judges to modify the terms of “nontraditional” mortgages -- such as those that start with low interest rates that later reset to higher ones -- to make them easier for homeowners to afford.

Such a move, which would partially reverse a tightening of bankruptcy rules approved by Congress only two years ago, is adamantly opposed by the lending industry.

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Frank and fellow Democrats also want the administration to declare support for a new economic stimulus package atop the $100 billion in tax rebates sent out earlier this year. Such a package, however, would be handled separately from the bailout legislation.

Despite the remaining disagreements, Frank and House Speaker Nancy Pelosi (D-San Francisco) said at a joint appearance that there was substantial progress toward a final bill.

“We’ve gotten closer to where we think [the bailout plan] ought to be,” Frank said. “We’re not quite there yet.”

“And we’re not sending a blank check to Wall Street,” Pelosi added.

A senior Treasury Department official said the administration and Frank had engaged in a “constant back-and-forth” since Saturday and were “making good progress.”

The latest chapter in the 14-month-long financial crisis began late last week when Paulson and Federal Reserve Chairman Ben S. Bernanke told congressional leaders that efforts to stave off trouble with ad hoc methods had failed and that only a giant government rescue could save the financial system -- and with it, the economy -- from collapse.

Lawmakers got their first peek at what the two men had in mind when Paulson sent legislative language to Capitol Hill on Saturday. The 2 1/2 -page document would have given the Treasury secretary essentially unrestrained power to borrow and spend $700 billion to buy troubled mortgage assets in hopes that such a move would restore confidence in the financial system and enable it to operate normally again.

Paulson and Bernanke are scheduled to testify today at a Senate Banking Committee hearing on the legislation.

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If the bailout works, the bill ultimately paid by taxpayers would be considerably lower than the initial outlay of as much as $700 billion to buy mortgages and mortgage-backed securities, Frank and independent economists said. That’s because the government would be paying fire-sale prices and could eventually sell many of the securities, perhaps at a profit depending on how the housing market fares in the years ahead.

While lawmakers and the administration dickered, the Fed took new steps to bolster the country’s shaken banks by easing long-standing restrictions on buyout firms’ ability to take large stakes in banks.

The action, designed to encourage such firms to invest in banks, reflected Fed officials’ concern that banks, especially small ones, might be running short of capital, their financial cushion against losses.

Most lawmakers continued to say Monday that they saw the sweeping bailout measure as necessary and predicted swift passage.

“We are convinced that inaction could be a disaster,” said Sen. Robert F. Bennett (R-Utah). “We don’t believe that inaction is an option.”

Some Republicans signaled they would even support provisions previously considered GOP heresy, such as the executive compensation cap for companies that participate in the rescue.

“Taxpayers should not subsidize multimillion-dollar buyouts for CEOs and other top managers who created this problem,” said Sen. Lindsey Graham (R-S.C). “If a company participates in a proposed government rescue plan, there should be limits on the executive’s compensation. They should not be rewarded for their massive failures.”

But in a move that could spell trouble for the proposal, a key lawmaker, Alabama Sen. Richard C. Shelby, the top Republican on the Senate Banking Committee, labeled the Treasury proposal “neither workable nor comprehensive, despite its enormous price tag.”

“In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted,” Shelby said in a statement.

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peter.gosselin@latimes.com

richard.simon@latimes.com

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Times staff writers James Gerstenzang and Nicole Gaouette contributed to this report.

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More coverage

Markets: Stocks and the dollar dive. Business, C1

Shift: Basic banks back in vogue. Business, C1

Asia: A crucial role in U.S. recovery. Business, C1


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